This document provides an overview of accounting for liabilities. It begins by listing 7 learning objectives for the chapter, which cover current liabilities, notes payable, other current liabilities, bonds, and financial statement presentation of liabilities. The document then defines current liabilities and notes payable, providing examples of accounting entries. It describes other current liabilities such as accounts payable, unearned revenue, and payroll and taxes. Finally, it discusses types of bonds, how they are issued, and how market value is determined.
Describe and apply the lower-of-cost-or-net realizable value rule.
Identify other inventory valuation issues.
Determine ending inventory by applying the gross profit method.
Determine ending inventory by applying the retail inventory method.
Explain how to report and analyze inventory.
Current Liabilities, Provisions, and Contingenciesreskino1
Current Liabilities,
Provisions, and Contingencies
After studying this chapter, you should be able to:
1. Describe the nature, valuation, and reporting of current liabilities.
2. Explain the accounting for different types of provisions.
3. Explain the accounting for loss and gain contingencies.
4. Indicate how to present and analyze liability-related information
In case you need to present economic status of your company then our content-ready financial statement analysis PowerPoint Presentation is ideal for you. This income statement PPT presentation having multiple slides such as financial projections, key financial ratios, liquidity ratios, cash flow statement KPIs, profitability ratios, activity ratios, solvency ratios, income statement overview and funding updates etc. This cash flow assessment PowerPoint template goes well with topics like profitability analysis, business impact analysis, financial health, and income statement, balance sheet, statement of cash flow, business performance analysis, financial health, and future prospects of an organization, project future performance, economic analysis, company analysis, business valuation, fundamental analysis. For successful business presentation, PowerPoint background is as important as the content in the slides. Our accounting statement PPT slide provides you both content rich as well as professional slides. Download our financial statement analysis presentation slides to project your business future performance. Elucidate on your ideas with our Financial Statement Analysis PowerPoint Presentation Slides. Drive your team to excellence.
Describe and apply the lower-of-cost-or-net realizable value rule.
Identify other inventory valuation issues.
Determine ending inventory by applying the gross profit method.
Determine ending inventory by applying the retail inventory method.
Explain how to report and analyze inventory.
Current Liabilities, Provisions, and Contingenciesreskino1
Current Liabilities,
Provisions, and Contingencies
After studying this chapter, you should be able to:
1. Describe the nature, valuation, and reporting of current liabilities.
2. Explain the accounting for different types of provisions.
3. Explain the accounting for loss and gain contingencies.
4. Indicate how to present and analyze liability-related information
In case you need to present economic status of your company then our content-ready financial statement analysis PowerPoint Presentation is ideal for you. This income statement PPT presentation having multiple slides such as financial projections, key financial ratios, liquidity ratios, cash flow statement KPIs, profitability ratios, activity ratios, solvency ratios, income statement overview and funding updates etc. This cash flow assessment PowerPoint template goes well with topics like profitability analysis, business impact analysis, financial health, and income statement, balance sheet, statement of cash flow, business performance analysis, financial health, and future prospects of an organization, project future performance, economic analysis, company analysis, business valuation, fundamental analysis. For successful business presentation, PowerPoint background is as important as the content in the slides. Our accounting statement PPT slide provides you both content rich as well as professional slides. Download our financial statement analysis presentation slides to project your business future performance. Elucidate on your ideas with our Financial Statement Analysis PowerPoint Presentation Slides. Drive your team to excellence.
Valuation of Inventories: A Cost-Basis Approachreskino1
Describe inventory classifications and different inventory systems.
Identify the goods and costs included in inventory.
Compare the cost flow assumptions used to account for inventories.
Determine the effects of inventory errors on the financial statements.
Cash is the most liquid of assets.
Offers both liquidity and flexibility.
Both the beginning and the end of a company’s operating cycle.
Contrast: Accrual accounting and Cash basis accounting.
Net cash flow as the end measure of profitability.
Cash flow analysis helps in assessing liquidity, solvency, and financial flexibility.
Valuation of Inventories: A Cost-Basis Approachreskino1
Describe inventory classifications and different inventory systems.
Identify the goods and costs included in inventory.
Compare the cost flow assumptions used to account for inventories.
Determine the effects of inventory errors on the financial statements.
Cash is the most liquid of assets.
Offers both liquidity and flexibility.
Both the beginning and the end of a company’s operating cycle.
Contrast: Accrual accounting and Cash basis accounting.
Net cash flow as the end measure of profitability.
Cash flow analysis helps in assessing liquidity, solvency, and financial flexibility.
444ChapterLiabilitiesAfter studying this chapter, yo.docxgilbertkpeters11344
444
Chapter
Liabilities
After studying this chapter, you should be
able to:
1 Explain a current liability, and identify
the major types of current liabilities.
2 Describe the accounting for notes
payable.
3 Explain the accounting for other current
liabilities.
4 Explain why bonds are issued, and
identify the types of bonds.
5 Prepare the entries for the issuance of
bonds and interest expense.
6 Describe the entries when bonds are
redeemed or converted.
7 Describe the accounting for long-term
notes payable.
8 Identify the methods for the presentation
and analysis of long-term liabilities.
S T U D Y O B J E C T I V E S
Feature Story
The Navigator✓
10
FINANCING HIS DREAMS
What would you do if you had a great idea for a new product, but couldn’t
come up with the cash to get the business off the ground? Small businesses
often cannot attract investors. Nor can they obtain traditional debt financing
through bank loans or bond issuances. Instead, they often resort to unusual,
and costly, forms of nontraditional financing.
Such was the case for Wilbert Murdock. Murdock grew up in a New York
housing project, and always had great ambitions. This ambitious spirit led him
into some business ventures that failed: a medical diagnostic tool, a device to
eliminate carpal-tunnel syndrome, custom-designed sneakers, and a device to
keep people from falling asleep while driving.
Scan Study Objectives ■
Read Feature Story ■
Read Preview ■
Read text and answer
p. 453 ■ p. 458 ■ p. 461 ■ p. 463 ■
p. 465 ■
Work Comprehensive p. 469 ■
Review Summary of Study Objectives ■
Answer Self-Study Questions ■
Complete Assignments ■
The Navigator✓
Do it!
Do it!
JWCL165_c10_444-505.qxd 8/12/09 7:24 AM Page 444
445
Another idea was computer-
ized golf clubs that analyze a
golfer’s swing and provide
immediate feedback. Murdock
saw great potential in the
idea: Many golfers are willing
to shell out considerable sums
of money for devices that
might improve their game.
But Murdock had no cash to
develop his product, and
banks and other lenders had
shied away. Rather than give
up, Murdock resorted to credit cards—in a big way. He quickly owed $25,000
to credit card companies.
While funding a business with credit cards might sound unusual, it isn’t. A
recent study found that one-third of businesses with fewer than 20 employ-
ees financed at least part of their operations with credit cards. As Murdock
explained, credit cards are an appealing way to finance a start-up because
“credit-card companies don’t care how the money is spent.” However, they
do care how they are paid. And so Murdock faced high interest charges and
a barrage of credit card collection letters.
Murdock’s debt forced him to sacrifice nearly everything in order to keep
his business afloat. His car stopped running, he barely had enough money
to buy food, and he lived and worked out of a dimly lit apartment in his
mother’s basement. Through it all he tried to maintain a po.
The Indian economy is classified into different sectors to simplify the analysis and understanding of economic activities. For Class 10, it's essential to grasp the sectors of the Indian economy, understand their characteristics, and recognize their importance. This guide will provide detailed notes on the Sectors of the Indian Economy Class 10, using specific long-tail keywords to enhance comprehension.
For more information, visit-www.vavaclasses.com
Ethnobotany and Ethnopharmacology:
Ethnobotany in herbal drug evaluation,
Impact of Ethnobotany in traditional medicine,
New development in herbals,
Bio-prospecting tools for drug discovery,
Role of Ethnopharmacology in drug evaluation,
Reverse Pharmacology.
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
This is a presentation by Dada Robert in a Your Skill Boost masterclass organised by the Excellence Foundation for South Sudan (EFSS) on Saturday, the 25th and Sunday, the 26th of May 2024.
He discussed the concept of quality improvement, emphasizing its applicability to various aspects of life, including personal, project, and program improvements. He defined quality as doing the right thing at the right time in the right way to achieve the best possible results and discussed the concept of the "gap" between what we know and what we do, and how this gap represents the areas we need to improve. He explained the scientific approach to quality improvement, which involves systematic performance analysis, testing and learning, and implementing change ideas. He also highlighted the importance of client focus and a team approach to quality improvement.
2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
Palestine last event orientationfvgnh .pptxRaedMohamed3
An EFL lesson about the current events in Palestine. It is intended to be for intermediate students who wish to increase their listening skills through a short lesson in power point.
How to Split Bills in the Odoo 17 POS ModuleCeline George
Bills have a main role in point of sale procedure. It will help to track sales, handling payments and giving receipts to customers. Bill splitting also has an important role in POS. For example, If some friends come together for dinner and if they want to divide the bill then it is possible by POS bill splitting. This slide will show how to split bills in odoo 17 POS.
3. 10-3
After studying this chapter, you should be able to:
1. Explain a current liability and identify the major types of current
liabilities.
2. Describe the accounting for notes payable.
3. Explain the accounting for other current liabilities.
4. Identify the types of bonds.
5. Prepare the entries for the issuance of bonds and interest expense.
6. Describe the entries when bonds are redeemed.
7. Identify the requirements for the financial statement presentation and
analysis of liabilities.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
5. 10-5
Two key features:
1. Company expects to pay the debt from existing current
assets or through the creation of other current
liabilities.
2. Company will pay the debt within one year or the
operating cycle, whichever is longer.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
LO 1 Explain a current liability and identify the
major types of current liabilities.
Current liabilities include notes payable, accounts payable, unearned
revenues, and accrued liabilities such as taxes, salaries and wages, and
interest.
What is a Current Liability?
6. 10-6
To be classified as a current liability, a debt must be
expected to be paid:
a. out of existing current assets.
b. by creating other current liabilities.
c. within 2 years.
d. both (a) and (b).
LO 1 Explain a current liability and identify the
major types of current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Question
7. 10-7 LO 2 Describe the accounting for notes payable.
Notes Payable
Written promissory note.
Usually require the borrower to pay interest.
Those due within one year of the balance sheet date are
usually classified as current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
8. 10-8
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2014, if Cole Williams Co. signs a $100,000, 12%,
four-month note maturing on January 1. When a company issues
an interest-bearing note, the amount of assets it receives
generally equals the note’s face value.
Notes payable
100,000
Cash 100,000
LO 2 Describe the accounting for notes payable.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Sept. 1
9. 10-9
Illustration: If Cole Williams Co. prepares financial statements
annually, it makes an adjusting entry at December 31 to recognize
interest.
Interest payable
4,000
Interest expense 4,000 *
LO 2 Describe the accounting for notes payable.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Dec. 31
* $100,000 x 12% x 4/12 = 4,000
10. 10-10
Illustration: At maturity (January 1), Cole Williams Co. must pay
the face value of the note plus interest. It records payment as
follows.
Interest payable 4,000
Notes payable 100,000
LO 2 Describe the accounting for notes payable.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Jan. 1
Cash
104,000
11. 10-11 LO 3 Explain the accounting for other current liabilities.
Sales Tax Payable
Sales taxes are expressed as a stated percentage of the
sales price.
Selling company
► collects tax from the customer.
► remits the collections to the state’s department of
revenue.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
12. 10-12
Illustration: The March 25 cash register readings for Cooley
Grocery show sales of $10,000 and sales taxes of $600 (sales tax
rate of 6%), the journal entry is:
LO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Mar. 25
Sales revenue
10,000
Cash 10,600
Sales tax payable
600
13. 10-13
Illustration: Cooley Grocery rings up total receipts of $10,600.
Because the amount received from the sale is equal to the sales
price 100% plus 6% of sales, (sales tax rate of 6%), the journal
entry is:
LO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Mar. 25
Sales revenue
10,000
Cash 10,600
Sales tax payable
600
Sometimes companies do not ring up sales taxes separately on
the cash register.
* $10,600 / 1.06 = $10,000
*
14. 10-14 LO 3 Explain the accounting for other current liabilities.
Unearned Revenue
Revenues that are received before the company delivers
goods or provides service.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
1. Company debits Cash, and credits a
current liability account (Unearned
Revenue).
2. When the company earns the
revenue, it debits the Unearned
Revenue account, and credits a
revenue account.
15. 10-15
Illustration: Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule. The entry for
the sales of season tickets is:
LO 3 Explain the accounting for other current liabilities.
Unearned ticket revenue
500,000
Cash 500,000Aug. 6
Ticket revenue
100,000
Unearned ticket revenue 100,000Sept. 7
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
As each game is completed, Superior records the earning of
revenue.
16. 10-16
Illustration: Wendy Construction issues a five-year, interest-bearing
$25,000 note on January 1, 2011. This note specifies that each January 1,
starting January 1, 2012, Wendy should pay $5,000 of the note. When the
company prepares financial statements on December 31, 2011,
1. What amount should be reported as a current liability? ___________
2. What amount should be reported as a long-term liability? _________
Current Maturities of Long-Term Debt
Portion of long-term debt that comes due in the current
year.
No adjusting entry required.
LO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
$5,000
$20,000
17. 10-17
The term “payroll” pertains to both:
Salaries - managerial, administrative, and sales personnel
(monthly or yearly rate).
Wages - store clerks, factory employees, and manual
laborers (rate per hour).
LO 3 Explain the accounting for other current liabilities.
Payroll and Payroll Taxes Payable
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Determining the payroll involves computing three amounts:
(1) gross earnings, (2) payroll deductions, and (3) net
pay.
18. 10-18
Illustration: Assume Cargo Corporation records its payroll for the
week of March 7 as follows:
Salaries and wages expense 100,000
Federal income tax payable 21,864
FICA tax payable 7,650
State income tax payable 2,922
Salaries and wages payable 67,564
LO 3
Cash 67,564
Salaries and wages payable 67,564Mar. 7
Record the payment of this payroll on March 7.
Mar. 7
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
19. 10-19
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:
FICA tax
Federal unemployment tax
State unemployment tax
LO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
20. 10-20
Illustration: Based on Cargo Corp.’s $100,000 payroll,
the company would record the employer’s expense and liability
for these payroll taxes as follows.
Payroll tax expense 13,850
State unemployment taxes payable 800
FICA tax payable 7,650
Federal unemployment taxes payable 5,400
LO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
21. 10-21
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.
Question
LO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
23. 10-23
Bonds are a form of interest-bearing notes payable issued
by corporations, universities, and governmental agencies.
Sold in small denominations (usually $1,000 or multiples of
$1,000).
When a corporation issues bonds, it is borrowing money. The
person who buys the bonds (the bondholder) is investing in
bonds.
LO 4 Identify the types of bonds.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
24. 10-24
Types of Bonds
Secured
Unsecured
Convertible
Callable
LO 4 Identify the types of bonds.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
26. 10-26
Bond certificate
► Issued to the investor.
► Provides name of the company issuing bonds, face
value, maturity date, and contractual (stated) interest
rate.
Face value - principal due at the maturity.
Maturity date - date final payment is due.
Contractual interest rate – rate to determine cash interest
paid, generally semiannually.
LO 4 Identify the types of bonds.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
Issuing Procedures Alternative Terminology The
contractual rate is often referred
to as the stated rate.
28. 10-28
Determining the Market Value of Bonds
The process of finding the present value is referred
to as discounting the future amounts.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
LO 4 Identify the types of bonds.
The current market price (present value) of a bond is a function of
three factors:
1. the dollar amounts to be received,
2. the length of time until the amounts are received, and
3. the market rate of interest.
29. 10-29
Illustration: Assume that Acropolis Company on January 1, 2014,
issues $100,000 of 9% bonds, due in five years, with interest
payable annually at year-end.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
Illustration 10-5
Computing the
market price of
bonds
Illustration 10-4
Time diagram
depicting cash
flows
LO 4 Identify the types of bonds.
30. 10-30
A corporation records bond transactions when it
issues or retires (buys back) bonds and
when bondholders convert bonds into common stock.
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Bonds may be issued at
face value,
below face value (discount), or
above face value (premium).
Bond prices are quoted as a percentage of face value.
LO 5 Prepare the entries for the issuance of bonds and interest expense.
31. 10-31
The rate of interest investors demand for loaning funds
to a corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
Question
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
32. 10-32
Illustration: Devor Corporation issues 100, five-year, 10%, $1,000
bonds dated January 1, 2014, at 100 (100% of face value). The
entry to record the sale is:
Jan. 1 Cash 100,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
Bonds payable 100,000
Prepare the entry Devor would make to accrue interest on
December 31. ($100,000 x 10% x 12/12)
Dec. 31 Interest expense 10,000
Interest payable 10,000
33. 10-33
Prepare the entry Devor would make to pay the interest on Jan. 1,
2015.
Jan. 1 Interest payable 10,000
Cash 10,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
34. 10-34 LO 5
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Issue at Par, Discount, or Premium?
Illustration 10-6
Helpful Hint Bond prices vary inversely with changes in the market interest rate. As
market interest rates decline, bond prices increase. When a bond is issued, if the market
interest rate is below the contractual rate, the bond price is higher than the face value.
35. 10-35
Karson Inc. issues 10-year bonds with a maturity value of
$200,000. If the bonds are issued at a premium, this
indicates that:
a. the contractual interest rate exceeds the market
interest rate.
b. the market interest rate exceeds the contractual
interest rate.
c. the contractual interest rate and the market interest
rate are the same.
d. no relationship exists between the two rates.
Question
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
36. 10-36
Illustration: Assume that on January 1, 2014, Candlestick Inc.
sells $100,000, five-year, 10% bonds at 98 (98% of face value)
with interest payable on January 1. The entry to record the
issuance is:
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Jan. 1 Cash 98,000
Discount on bonds payable 2,000
Bonds payable 100,000
37. 10-37
Statement Presentation
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Illustration 10-7
Statement presentation of
discount on bonds payable
Sale of bonds below face value causes the total cost of borrowing to be
more than the bond interest paid.
The reason: Borrower is required to pay the bond discount at the maturity
date. Thus, the bond discount is considered to be a increase in the cost
of borrowing.
38. 10-38
Total Cost of Borrowing
Illustration 10-8
Illustration 10-9
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
39. 10-39
Discount on Bonds Payable:
a. has a credit balance.
b. is a contra account.
c. is added to bonds payable on the balance sheet.
d. increases over the term of the bonds.
Question
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Helpful Hint Both a discount
and a premium account are
valuation accounts. A valuation
account is one that is needed to
value properly the item to which
it relates.
40. 10-40
Illustration: Assume that the Candlestick Inc. bonds previously
described sell at 102 rather than at 98. The entry to record the sale
is:
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Jan. 1 Cash 102,000
Bonds payable 100,000
Premium on bonds payable 2,000
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
41. 10-41 LO 5 Prepare the entries for the issuance of bonds and interest expense.
Illustration 10-11
Statement presentation of
premium on bonds payable
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
Sale of bonds above face value causes the total cost of borrowing to be less
than the bond interest paid.
The reason: The borrower is not required to pay the bond premium at the
maturity date of the bonds. Thus, the bond premium is considered to be a
reduction in the cost of borrowing.
Statement Presentation
42. 10-42
Illustration 10-12
Illustration 10-13
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Total Cost of Borrowing
43. 10-43
Redeeming Bonds at Maturity
LO 6 Describe the entries when bonds are redeemed.
Candlestick records the redemption of its bonds at maturity as
follows:
Accounting for Bond RedemptionsAccounting for Bond RedemptionsAccounting for Bond RedemptionsAccounting for Bond Redemptions
Bonds payable 100,000
Cash 100,000
44. 10-44
When a company retires bonds before maturity, it is necessary
to:
1. eliminate the carrying value of the bonds at the redemption
date;
2. record the cash paid; and
3. recognize the gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds less
unamortized bond discount or plus unamortized bond premium at the
redemption date.
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
LO 6 Describe the entries when bonds are redeemed.
Redeeming Bonds at Maturity
45. 10-45
When bonds are redeemed before maturity, the gain or loss
on redemption is the difference between the cash paid and
the:
a. carrying value of the bonds.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.
Question
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
LO 6 Describe the entries when bonds are redeemed.
46. 10-46
Cash 103,000
Loss on bond redemption 2,600
Illustration: Assume at the end of the fourth period, Candlestick
Inc., having sold its bonds at a premium, retires the bonds at 103
after paying the annual interest. Assume that the carrying value of
the bonds at the redemption date is $100,400 (principal $100,000
and premium $400). Candlestick records the redemption at the end
of the fourth interest period (January 1, 2018) as:
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
Bonds payable 100,000
Premium on bonds payable 400
LO 6 Describe the entries when bonds are redeemed.
47. 10-47
When bonds are converted into common stock:
a. a gain or loss is recognized.
b. the carrying value of the bonds is transferred to paid-
in capital accounts.
c. the market price of the stock is considered in the
entry.
d. the market price of the bonds is transferred to paid-in
capital.
Question
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
LO 6 Describe the entries when bonds are redeemed.
48. 10-48
Balance Sheet Presentation
LO 7
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Illustration 10-15
49. 10-49
Analysis
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Illustration 10-16
LO 7
50. 10-50
Liquidity
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Liquidity ratios measure the short-term ability of a company to pay its
maturing obligations and to meet unexpected needs for cash.
LO 7 Identify the requirements for the financial statement
presentation and analysis of liabilities.
Illustration 10-17
51. 10-51
Solvency
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Solvency ratios measure the ability of a company to survive over a
long period of time.
LO 7
Illustration 10-18
53. 10-53
Off-Balance-Sheet Financing
Contingencies
Leasing
► Operating lease
► Capital lease
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
LO 7 Identify the requirements for the financial statement
presentation and analysis of liabilities.
55. 10-55
Appendix 10AAppendix 10AAppendix 10AAppendix 10A
To follow the expense recognition principle, companies allocate
bond discount to expense in each period in which the bonds are
outstanding.
Illustration 10A-1
Amortizing Bond Discount
LO 8 Apply the straight-line method of amortizing bond
discount and bond premium.
Straight-Line
Amortization
56. 10-56
Appendix 10AAppendix 10AAppendix 10AAppendix 10A
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $98,000 (discount of $2,000).
Interest is payable on January 1 of each year. Prepare the
entry to accrue interest at Dec. 31, 2014.
Discount on bonds payable
400
Interest expense 10,400Dec. 31
Interest payable
10,000
LO 8 Apply the straight-line method of amortizing bond
discount and bond premium.
Amortizing Bond Discount
Straight-Line
Amortization
57. 10-57
Appendix 10AAppendix 10AAppendix 10AAppendix 10A
Illustration 10A-2
LO 8 Apply the straight-line method of amortizing bond
discount and bond premium.
Amortizing Bond Discount
Straight-Line
Amortization
58. 10-58
Appendix 10AAppendix 10AAppendix 10AAppendix 10A
Amortizing Bond Premium
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $102,000 (premium of $2,000).
Interest is payable on January 1 of each year. Prepare the
entry to accrue interest at Dec. 31, 2014.
Premium on bonds payable 400
Interest expense 9,600Dec. 31
Interest payable
10,000
LO 8 Apply the straight-line method of amortizing bond
discount and bond premium.
Straight-Line
Amortization
59. 10-59
Appendix 10AAppendix 10AAppendix 10AAppendix 10A
Illustration 10A-4
LO 8 Apply the straight-line method of amortizing bond
discount and bond premium.
Amortizing Bond Premium
Straight-Line
Amortization
60. 10-60
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
Illustration 10B-1
Under the effective-interest method, the amortization of the
discount or premium results in interest expense equal to a
constant percentage of the carrying value.
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
Effective Interest
Amortization
LO 9
61. 10-61
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
LO 9 Apply the effective-interest method of amortizing bond
discount and bond premium.
Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds
on January 1, 2014, for $98,000. The effective-interest rate is
10.53% and interest is payable on Jan. 1 of each year. Prepare the
bond discount amortization schedule.
Effective Interest
Amortization
Amortizing Bond Discount
62. 10-62
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
Illustration 10B-2
LO 9 Apply the effective-interest method of amortizing bond
discount and bond premium.
Effective Interest
Amortization
Amortizing Bond Discount
63. 10-63
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
Illustration: Candlestick, Inc. records the accrual of interest
and amortization of bond discount on Dec. 31, as follows:
LO 9 Apply the effective-interest method of amortizing
bond discount and bond premium.
Discount on bonds payable
319
Interest expense 10,319Dec. 31
Interest payable
10,000
Effective Interest
Amortization
Amortizing Bond Discount
64. 10-64
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $102,000. The effective-interest rate
is 9.48% and interest is payable on Jan. 1 of each year. Prepare
the bond premium amortization schedule.
Effective Interest
Amortization
Amortizing Bond Premium
LO 9 Apply the effective-interest method of amortizing
bond discount and bond premium.
65. 10-65
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
Illustration 10B-4
Effective Interest
Amortization
Amortizing Bond Premium
LO 9 Apply the effective-interest method of amortizing
bond discount and bond premium.
66. 10-66
Appendix 10BAppendix 10BAppendix 10BAppendix 10B
Illustration: Candlestick, Inc. records the accrual of interest
and amortization of premium discount on Dec. 31, as follows:
Premium on bonds payable 330
Interest expense 9,670Dec. 31
Interest payable
10,000
Effective Interest
Amortization
Amortizing Bond Premium
LO 9 Apply the effective-interest method of amortizing
bond discount and bond premium.
67. 10-67
Appendix 10CAppendix 10CAppendix 10CAppendix 10C
May be secured by a mortgage that pledges title to specific
assets as security for a loan.
Typically, the terms require the borrower to make installment
payments over the term of the loan. Each payment consists of
1. interest on the unpaid balance of the loan and
2. a reduction of loan principal.
Companies initially record mortgage notes payable at face
value.
LO 10 Describe the accounting for long-term notes payable.
Long-Term
Notes Payable
Long-Term Notes Payable
68. 10-68
Appendix 10CAppendix 10CAppendix 10CAppendix 10C
Illustration 10C-1
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-
year mortgage note on December 31, 2014. The terms provide for
semiannual installment payments of $33,231.
LO 10 Describe the accounting for long-term notes payable.
Long-Term
Notes Payable
69. 10-69
Appendix 10CAppendix 10CAppendix 10CAppendix 10C
Illustration: Porter Technology records the mortgage loan and
first installment payment as follows:
LO 10 Describe the accounting for long-term notes payable.
Mortgage payable 500,000
Cash 500,000Dec. 31
Mortgage payable 3,231
Interest expense 30,000Jun. 30
Cash 33,231
Long-Term
Notes Payable
70. 10-70
Appendix 10CAppendix 10CAppendix 10CAppendix 10C
Each payment on a mortgage note payable consists of:
a. interest on the original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and
reduction of loan principal.
d. interest on the unpaid balance of the loan and
reduction of loan principal.
Question
LO 10 Describe the accounting for long-term notes payable.
Long-Term
Notes Payable
71. 10-71
Key Points
Liabilities are defined by the IASB as a present obligation of the
entity arising from past events, the settlement of which is expected
to result in an outflow from the entity of resources embodying
economic benefits. Liabilities may be legally enforceable via a
contract or law but need not be. That is, they can arise due to
normal business practices or customs.
IFRS requires that companies classify liabilities as current or non-
current on the face of the statement of financial position (balance
sheet) except in industries where a presentation based on liquidity
would be considered to provide more useful information (such as
financial institutions). When current liabilities are presented, they are
generally presented in order of liquidity.
LO 11
72. 10-72
Key Points
Under IFRS, liabilities are classified as current if they are expected
to be paid within 12 months.
Similar to GAAP, items are normally reported in order of liquidity.
Companies sometimes show liabilities before assets. Also, they will
sometimes show non-current (long-term) liabilities before current
liabilities.
Under both GAAP and IFRS, preferred stock that is required to be
redeemed at a specific point in time in the future must be reported
as debt, rather than being presented as either equity or in a
“mezzanine” area between debt and equity.
LO 11 Compare the accounting procedures for
liabilities under GAAP and IFRS.
73. 10-73
Key Points
Under IFRS, companies sometimes will net current liabilities against
current assets to show working capital on the face of the statement
of financial position. (This is evident in the Zetar financial
statements in Appendix C.)
IFRS requires use of the effective-interest method for amortization
of bond discounts and premiums. GAAP allows use of the straight-
line method where the difference is not material. Under IFRS,
companies do not use a premium or discount account but instead
show the bond at its net amount.
LO 11 Compare the accounting procedures for
liabilities under GAAP and IFRS.
74. 10-74
Key Points
Unlike GAAP, IFRS splits the proceeds from the convertible bond
between an equity component and a debt component. The equity
conversion rights are reported in equity.
Both Boards share the same objective of recording leases by
lessees and lessors according to their economic substance—that is,
according to the definitions of assets and liabilities. However, GAAP
for leases is much more “rules-based,” with specific bright-line
criteria (such as the “90% of fair value” test) to determine if a lease
arrangement transfers the risks and rewards of ownership. IFRS is
more conceptual in its provisions. Rather than a 90% cut-off, it asks
whether the agreement transfers substantially all of the risks and
rewards associated with ownership.
LO 11
75. 10-75
Key Points
Under GAAP, some contingent liabilities are recorded in the
financial statements, others are disclosed, and in some cases no
disclosure is required. Unlike GAAP, IFRS reserves the use of the
term contingent liability to refer only to possible obligations that are
not recognized in the financial statements but may be disclosed if
certain criteria are met.
For those items that GAAP would treat as recordable contingent
liabilities, IFRS instead uses the term provisions. Provisions are
defined as liabilities of uncertain timing or amount. Under IFRS, the
measurement of a provision related to an uncertain obligation is
based on the best estimate of the expenditure required to settle the
obligation.
LO 11
76. 10-76
Looking to the Future
The FASB and IASB are currently involved in two projects. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental building
blocks of accounting. In addition to these projects, the FASB and IASB
have also identified leasing as one of the most problematic areas of
accounting. A joint project will initially focus primarily on lessee accounting.
One of the first areas to be studied is, “What are the assets and liabilities
to be recognized related to a lease contract?” Should the focus remain on
the leased item or the right to use the leased item? This question is tied to
the Boards’ joint project on the conceptual framework—defining an “asset”
and a “liability.”
LO 11
77. 10-77
IFRS Practice
LO 11 Compare the accounting procedures for
liabilities under GAAP and IFRS.
Which of the following is false?
a) Under IFRS, current liabilities must always be presented before
non-current liabilities.
b) Under IFRS, an item is a current liability if it will be paid within the
next 12 months.
c) Under IFRS, current liabilities are shown in order of liquidity.
d) Under IFRS, a liability is only recognized if it is a present
obligation.
78. 10-78
IFRS Practice
Under IFRS, a contingent liability is:
a) disclosed in the notes if certain criteria are met.
b) reported on the face of the financial statements if certain
criteria are met.
c) the same as a provision.
d) not covered by IFRS.
LO 11 Compare the accounting procedures for
liabilities under GAAP and IFRS.
79. 10-79
IFRS Practice
The joint projects of the FASB and IASB could potentially:
a) change the definition of liabilities.
b) change the definition of equity.
c) change the definition of assets.
d) All of the above.
LO 11 Compare the accounting procedures for
liabilities under GAAP and IFRS.